The Flanders-China Chamber of Commerce organized a webinar – with the support of structural partner Flanders Investment & Trade – on the topic of 'Likely pricing scenarios: how much will it cost you to ship by sea and rail between Europe and China in 2022?' on January 26, 2022.
Ms Gwenn Sonck, Executive Director, Flanders-China Chamber of Commerce, introduced the webinar and the speakers. Current spot ocean tariffs from China to Europe continue to be high. During the webinar experts will address how long tariff rates and delivery times will continue and what changes – if any – can be expected in the coming months. What will be the impact for European businesses exporting to China and importing from China. Our experts will provide a comprehensive picture of the current rates on the different routes and compare ocean transport with transportation by rail, which is a growing option for many traders.
Each day China exports USD1 billion in goods while the EU exports USD500 million to China. Exports to other countries highlight the untapped potential for European companies in the Chinese market. For the full year of 2020, the value of completed European direct investment transactions in China reached €9.5 billion, a decrease of 21% compared to 2019. Also last year, European investments continued to fall, but China is a market that can't be ignored. One of the big challenges for companies doing business with China is the fact that we can't go to China due to the Covid-19 pandemic. However, the biggest risk for companies doing business with China is still not to be in China.
Mr Pepijn De Vreese, Chief Officer International Trade at the Port of Zeebrugge, talked about the impact of disruption on the global shipping supply chain. Before the financial crisis in 2008, container volumes grew on average 7% to 10% a year. Port authorities and shipping companies worldwide were investing to cope with the growth. After the financial crisis there was a huge drop in volume worldwide, creating overcapacity in the market, both in port infrastructure and capacity of the shipping lines. This created huge pressure on container rates, followed by rationalization and mergers in the sector. At the Port of Zeebrugge we used to have three smaller terminals, now we have one big one. There were bankruptcies and the forming of alliances of shipping companies to reduce cost per unit to ship a container. This also led to underinvestment in the sector for over a decade.
When Covid-19 happened this led to an imbalance in container availability, combined with a boom in e-commerce and depletion of stocks. The number of goods going through the major hubs increased, leading to congestion and a lack of vessel capacity. This spread from hub ports to other ports as companies started to bypass hub ports. This led to an increase in container rates and a decrease in customer service levels. Looking at the current container fleet activity, all container capacity was used at maximum level as the inactive container fleet stayed below 3% in 2021, which is an absolute minimum. In January 2022, the overall inactive fleet capacity stood at 553,045 TEU or 2.2% of the total fleet, while there are also many vessels in dry dock and being repaired. Fleets are used to the maximum with commercially idle ships under carrier control only at 98,696 TEU.
Port congestion raised vessel demand due to traffic jams. The impact was higher in the Asia-Pacific than on the Asia-Europe routes, but was still high. There was huge congestion at the UK's Felixstowe Port, but also in Rotterdam, Antwerp and other ports. There is no instant cure for the shortage in port infrastructure. You can't build infrastructure overnight. The availability of containers is a priority for shipping lines, which is a shift in strategy compared to the start of 2021 when they moved containers quickly back to Asia. Nowadays they are trying to provide a better service. They allow vessels to stay longer in the port to take out as many containers as possible, but it also means you need to take them out of the port, putting immense pressure on your complete logistics system. But container equipment shortages, although still problematic, are not as acute as in the beginning of 2021. However, many boxes are still stuck in the hinterland due to lack of manpower.
It is unlikely the situation will change until the second half of 2022 and pre-Covid container rates are unlikely in the medium term. A lot of capacity is being created and this could again lead to overcapacity but not in 2022 or 2023. Only 1.1 million TEU in newly built vessels is coming in 2022 and 2.3 million TEU are expected in 2023. But there are heavy investments required in the type of vessel because all shipping lines need to meet the decarbonization goals of the International Maritime Organization (IMO2030). If there is huge demand on shipyards to build vessels, the price of vessels will increase. When all vessels are taken you see a huge increase in rates to charter vessels into the fleet as shipping companies use a combination of own vessels and chartered ones. New players are now entering the market, paying huge amounts of money every day to charter vessels. If rates would fall, you would see again many bankruptcies. U.S. and EU ports are challenged with workforce fallouts due to Omicron in terminals, in hinterland transit and in warehouses. Adding port infrastructure requires a lot of money, time and space. The biggest challenge is space, as not all ports have additional space available to build new terminals and docks.
Omicron outbreaks in China – the factory of the world – and its ports can cause more heavy disruption in the supply chain. Due to the zero-Covid policy there is a lockdown whenever there is an outbreak and this creates waves in the supply chain. If China would open the gates for Omicron like in Europe, we can again expect more disruption in 2022. And let's not mention geopolitics, the tense situation could again impact the complete supply chain. On a positive note, every actor working in the logistics and supply chain is actively trying to find solutions.
Zeebrugge is in a strategic location for a logistic distribution center (LDC) along the Belt & Road. Since COSCO took over in 2017, we have seen a 20% growth in deep sea container volumes year-on-year with a peak of 54% in 2021. We also signed an extension of the concession agreement, gearing up for additional investment. In 2021 we had a first expansion at the container terminal and we are now looking at the second one in one year time. The target for 2022 is 20% to 30% growth. If the situation remains as it is today we will achieve this target by the end of 2022. Construction of the Lingang Logistics Park is underway with a delivery date set for August 2022. It is already 50% occupied but other companies are also investing to add logistics space.
The ports of Antwerp and Zeebrugge are going to merge pending final approval to become the Port of Antwerp Bruges by the end of April, beginning of May. We can already see a lot of benefit from that collaboration also in the container business. Increased connectivity between the two platforms will ease a lot of pressure on both sides. A big party is scheduled for April 28.
Mr Didier Duponselle, Business Unit Director Supply Chain Solutions, Ahlers, focussed on the container rates evolution to and from China. Ahlers is a family-owned logistics service provider with its headquarters in Antwerp. The company's mission is to deliver high-quality services to enable customers to focus on their business. It offers innovative, sustainable and tailor-made solutions beyond logistics. Ahlers has offices from Antwerp all the way to China.
The supply chain is disrupted not only in the short term, but the medium and even long term. Recent disruptive events include the “Ever Green” blocking the Suez Canal for one week with more than 300 vessels delayed and the aftermath still ongoing. Covid outbreaks at Chinese ports caused major delays in the Asia-EU and Asia-Americas trade. The U.S., Europe and the UK are faced with a shortage of drivers leading to container congestion in ports. Delays in Asia-bound exports are creating imbalance in equipment and decreasing the reliability of sailing schedules. There was also major congestion at the Los Angeles-Long Beach terminals with 70 vessels having to wait outside the port, again impacting global schedule reliability. Finally there is also the weather.
Consumption remains high at higher prices and higher container rates are paid. Container carriers continue to maximize prices and realizing extreme profits. An oligopoly of ocean carriers has been created with the total capacity of the top five carriers globally at a 75% market share. Looking at the top three alliances on some trades there is a market share of a stunning 90% or higher. Current experience remains a “take it or leave it” approach for freight rates, detention charges and underperforming trucking. There is still less accurate communication, vessel delays and roll overs for both shippers and forwarders.
There is a price hike for example for a 40 foot container on the Shanghai-Antwerp route. Prices are high but tend not to go up anymore. The variation in prices remains high. In March 2020, a normal variation was USD500 between the highest and lowest market tariff, while the difference now can be up to USD10,000. Both prices are accepted and market conform. On the Antwerp-Shanghai route there was a peak of USD3,000 in January 2021, dropping to USD1,500 today, a drop of 50% but still a lot higher than the initial price. The reason the price has come down is container availability. Westbound, there are still rates of USD13,500. Important to note is the difference between the spot rate and the NAC rate. If you ask for a rate today you get the spot rate, which is very high. Named account (NAC) rates for companies which have big volumes of more than 100 containers a week can be negotiated to obtain a better rate. On the spot market tariffs have gone up 10-fold in one year, while NAC rates increased three-fold.
Most companies are involved in the spot market. Influential factors on the spot market on the supply side are carriers versus forwarders; carrier capacity and pricing strategy; container availability and driver availability. The regulatory impact includes labor disputes in the EU, U.S. and UK; the mobility package of the EU; trade financing rules; sustainability and emission reduction; and the geopolitical impact. On the demand side there is inflation and the impact of spending behavior and sourcing strategies. Affecting all sides is the Covid pandemic. In the short term positive factors influencing the spot market are sourcing strategies, inflation and spending behavior – lower demand – and container availability. Worsening factors are carrier versus forwarding; geopolitics, sustainability & emissions reductions; mobility and labor disputes. In the medium term more factors are improving. Only geopolitics and sustainability & emissions reduction are expected to be worsening. Covid is expected to become endemic.
Comparing ocean rates with rail rates along the Silk Road for a 40 foot container we see the prices increase for the ocean rate from USD2,150 in December 2019 to USD13,500 in January 2022, while the rail rates dropped from USD16,900 in December 2019 to USD16,000 in January 2022. Look to rail as an alternative but not as a long-term sustainable option, as 80% of the route the locomotives are diesel engine ones. The Silk Road via road is currently no longer a viable option due to very high rates between USD18,000 and USD30,000 per truck.
In the medium and long term, expect a further reduction in tariffs at the earliest in the second half of 2022 of 30% to 40% according to the most positive sources. From the second half of 2022 till the second quarter of 2023 we expect still significant higher price levels compared to pre-Covid times if no other external factors occur. Prices will not go down again to pre-Covid levels, they will remain higher. Lead times will improve further as most carriers plan to continue fast sailing and more is slowly but steadily added. It appears e-commerce volumes are normalizing to pre-Covid times, but supply chain challenges will remain.
A Q&A session concluded the webinar. Do you see more innovation, digitalization, just-in-time port calls or collapsible containers? Mr De Vreese: A lot is happening in digitalization, improving visibility in the supply chain allowing for gains in efficiency. The issue is getting all parties to work together and to share data. How to improve terminal capacity without using too much space is another challenge.
When do you expect the market to normalize again? Mr Duponselle: As long as carriers have enormous power, they will continue. After Chinese New Year next year the market will normalize. Mr De Vreese: In defense of the carriers, don't underestimate the pressure the shipping lines experience to invest in new types of ships and technology to meet their ambitious goals. Just before Covid some carriers had to sell assets to improve their balance. Now they are earning excessively but they also have a lot of challenges ahead. Pre-Covid rates are not beneficial to anyone because this would lead to underinvestment.
What is the incentive for the carriers to increase capacity if they are currently enjoying increased rates? Mr Duponselle: Oligopolization ensured that the shipping world could survive in the long run but now we are experiencing the flip side. This should not last too long because everybody is complaining that this is no longer feasible. If they don't invest the authorities will intervene and create more competition. Mr De Vreese: What if there is a drop in volume after you spend a lot on new capacity? The biggest issue today is not vessel capacity, carriers are hesitant to invest in capacity. They invest in logistics and freight forwarding companies.